Seasonality pressures margins
Lecico reported Q2 19 revenue of EGP599.5mn, down 15.0% yoy and 5.9% qoq. The decline in sales was mainly driven by Ramadan. Coupled with weak purchasing power, this offset the increased contribution from promotional sales offers on stagnant stock piles in Lebanon. Export sales, on the other hand, were pressured on the back of the strengthening EGP.
The margins worsened both yoy and qoq due to lower sales volumes. The GPM contracted to 9.5% versus 17.6% in Q2 18 and 19.6% in Q1 19, while EBITDA margins turned negative. The company reported a net loss of EGP86.9mn in Q2 19, versus a net profit of EGP4.9mn in Q2 18 and net loss of EGP28.1mn in Q1 19. We expect the bottom line to remain in negative territory given the recent subsidy cuts, which will not only raise costs but further weigh down purchasing power.
The fruits of Lebanon restructuring
The company began its restructuring plan in early 2019. Promotions were offered on stagnant stock piles in Lebanon, which drove up sales. Production is currently being mobilised in Egypt, and will be ready to supply any inventory shortages starting end-19. As mentioned, shifting production to Egypt will help drive down costs. Despite the losses on sales promotions, employment settlement and other non-cash restructuring costs, the company managed to cut cash costs by cUS$1.5mn. The company is still trying to monetise the 28,000sqm of industrial land for sale in Lebanon that was previously valued at US$30mn in 2016. However, given the current conditions, the land monetisation is unlikely to happen any time soon. Moreover, the 2016 land valuation is, in fact, at premium relative to the current value. Based on our valuation, the plot could range from EGP1.5-6.2 per share, depending on the time of sale and land value (see valuation table on page 2).
Strengthening EGP and weak purchasing power to weigh down on performance
We reiterate our Underweight recommendation on FV of EGP3.00/share. The company is currently trading at FY 19 EV/EBITDA of 9.7x.